Economics with Market Liquidity Risk

Critical Finance Review, special issue on “Liquidity: Replications, Extensions, and Critique”, Forthcoming

NYU Stern School of Business

15 Pages Posted: 14 Sep 2019

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Date Written: September 6, 2019

Abstract

For markets to work efficiently, buyers and sellers must be able to transact easily. People must have access to a marketplace such as a supermarket or a stock exchange with adequate liquidity. Further, people must have confidence that such a well-functioning marketplace will also exist in the future. Market liquidity risk is the risk that the market will function poorly in the future, handcuffing the “invisible hand” through which markets produce allocative efficiency. We discuss the effects of market liquidity risk on asset pricing, investment management, corporate finance, banking, financial crises, macroeconomics, monetary policy, fiscal policy, and other economic areas.

Keywords: liquidity risk, asset pricing, financial crises, monetary policy, macroeconomics

JEL Classification: G01, G12, G20, G30, E00, E44, E52, D40

Suggested Citation

Acharya, Viral V. and Pedersen, Lasse Heje, Economics with Market Liquidity Risk (September 6, 2019). Critical Finance Review, special issue on “Liquidity: Replications, Extensions, and Critique”, Forthcoming, NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3449010 or http://dx.doi.org/10.2139/ssrn.3449010

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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